UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the quarterly period ended: March 31, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________________ to ________________
Commission file number 000-50619
MOMENTUM BIOFUELS, INC.
-----------------------
(Name of registrant in its Charter)
COLORADO 84-1069035
-------- ----------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2600 South Shore Blvd, Suite 100 League City, TX 77573
------------------------------------------------------
(Address of Principal Executive Offices)
(281) 334-5161
--------------
(Telephone # including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated file, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] (Do
not check if a smaller reporting company) Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X]
Indicate the number of share outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 14, 2008, there were 47,528,756 shares of the registrant's sole class
of common shares outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
----
Unaudited Consolidated Balance Sheets - March 31, 2008 and
December 31, 2007 F-1
Unaudited Consolidated Statements of Operations - Three months ended
March 31, 2008 and 2007 and F-2
Unaudited Consolidated Statements of Changes in Shareholders' Deficit -
March 31, 2008 F-3
Unaudited Consolidated Statements of Cash Flows - Three months ended
March 31, 2008 and 2007 and F-5
Notes to the Unaudited Consolidated Financial Statements F-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 1
Item 3. Quantitative and Qualitative Disclosures About Market Risk -
Not Applicable
Item 4. Controls and Procedures 3
Item 4T. Controls and Procedures 3
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 4
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 4
Item 3. Defaults Upon Senior Securities - Not Applicable 4
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable 5
Item 5. Other Information - Not Applicable 5
Item 6. Exhibits 5
SIGNATURES
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
For financial information, please see the financial statements and the notes
thereto, attached hereto and incorporated herein by this reference.
The financial statements have been prepared by Momentum Biofuels, Inc. without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted as allowed by such rules and
regulations, and management believes that the disclosures are adequate to make
the information presented not misleading. These financial statements include all
of the adjustments which, in the opinion of management, are necessary to a fair
presentation of financial position and results of operations. All such
adjustments are of a normal and recurring nature. These financial statements
should be read in conjunction with the audited financial statements at December
31, 2007, included in the Company's Form 10-KSB.
MOMENTUM BIOFUELS, INC. AND SUBSIDIARY
(formerly Tonga Capital Corporation)
Consolidated Balance Sheets
(Unaudited)
March 31, 2008 December 31, 2007
-------------------- --------------------
ASSETS
Current Assets
Cash $ 98,098 $ 777,171
Accounts Receivable, net 21,629 3,859
Inventory 19,136 56,759
Prepaid insurance 28,468 33,766
-------------------- --------------------
Total current assets 167,331 871,555
Property & equipment, net of accumulated depreciation and amortization 3,122,566 3,253,410
Security deposits 26,278 26,278
-------------------- --------------------
TOTAL ASSETS $ 3,316,175 $ 4,151,243
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 371,247 $ 194,226
Accrued expenses 183,225 191,942
Advances - related parties 10,000 -
Notes payable - related parties - 315,891
-------------------- --------------------
Total Current Liabilities 564,472 702,059
-------------------- --------------------
Stockholders' Equity
Common stock, $0.01 par value; 500,000,000 shares authorized,
47,528,756 and 54,828,475,287 shares issued and outstanding
on March 31, 2008 and December 31, 2007, respectively 475,287 548,287
Additional paid-in capital 12,341,407 11,853,153
Accumulated Deficit (10,064,991) (8,952,256)
-------------------- --------------------
Total Stockholders' Equity 2,751,703 3,449,184
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,316,175 $ 4,151,243
==================== ====================
See the accompanying notes to the consolidated financial statements.
F-1
MOMENTUM BIOFUELS, INC. AND SUBSIDIARY
(formerly Tonga Capital Corporation)
Consolidated Statements of Operations
For the Three Months Ended March 31, 2008 & 2007
(Unaudited)
2008 2007
-------------------- --------------------
Revenue $ 348,930 $ -
Cost of goods sold 251,623 -
-------------------- --------------------
Gross profit 97,307 -
Operating Expenses
Plant expenses 430,349 51,319
General and administrative 778,465 365,300
-------------------- --------------------
Total Operating Expenses 1,208,814 416,619
-------------------- --------------------
Loss from operations (1,111,507) (416,619)
-------------------- --------------------
Other Income (Expense)
Interest income 1,082 1,189
Interest expense (2,310) (7,917)
-------------------- --------------------
Total Other Income (Expense) (1,228) (6,728)
-------------------- --------------------
Net Loss $ (1,112,735) $ (423,347)
==================== ====================
Per Share Information:
Weighted average number of common shares outstanding - Basic and diluted 50,832,381 49,866,963
==================== ====================
Net Loss per Share $ (0.02) $ (0.01)
==================== ====================
See the accompanying notes to the consolidated financial statements.
F-2
MOMENTUM BIOFUELS, INC. AND SUBSIDIARY
(formerly Tonga Capital Corporation)
Consolidated Statement of Stockholders' Equity
For the Period from January 1, 2008 through March 31, 2008
(Unaudited)
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Totals
---------------- --------------- ----------------- ------------------ ---------------
Balance - December 31, 2007 54,828,756 $ 548,287 $11,853,153 $ (8,952,256) $ 3,449,184
Cancelled shares (7,500,000) (75,000) 75,000 - -
Shares issued in private
placement for cash 200,000 2,000 78,000 - 80,000
Share based compensation - - 335,254 - 335,254
Net loss (1,112,735) (1,112,735)
------------------------------------------------------------------------------------------
Balance - March 31, 2008 47,528,756 $ 475,287 $12,341,407 $ (10,064,991) $ 2,751,703
==========================================================================================
See the accompanying notes to the consolidated financial statements.
F-3
MOMENTUM BIOFUELS, INC. AND SUBSIDIARY
(formerly Tonga Capital Corporation)
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2008 & 2007
(Unaudited)
2008 2007
-------------------- --------------------
Cash Flows from Operating Activities
Net loss $ (1,112,735) $ (423,347)
Adjustments to reconcile net loss to cash used in operating activities
Depreciation 130,843 6,352
Share based compensation 335,254
Changes in Assets and Liabilities
Accounts receivable (17,770) -
Inventory 37,623 -
Prepaid expenses and other current assets 5,298 (8,042)
Accounts payable 177,021 (141,845)
Accrued expenses (8,716) 98,172
-------------------- --------------------
Net Cash Used in Operating Activities (453,182) (468,710)
Cash Flows used in Investing Activities
Acquisition of fixed assets - (614,544)
-------------------- --------------------
Net Cash Used in Investing Activities - (614,544)
Cash Flows from Financing Activities
Payment of note payable (315,891) (165,000)
Loans from shareholders 10,000 115,000
Stock issued for cash 80,000 850,000
Offering costs - (8,680)
Subscriptions payable - 380,000
-------------------- --------------------
Net Cash Provided (Used) by Financing Activities (225,891) 1,171,320
-------------------- --------------------
Net Increase (Decrease) in Cash (679,073) 88,066
Cash and cash equivalents - Beginning of period 777,171 19,477
-------------------- --------------------
Cash and cash equivalents - End of period $ 98,098 $ 107,543
==================== ====================
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the period for:
Interest $ 2,310 $ 13,441
===========================================
Income Taxes $ - $ -
===========================================
Non-Cash Transactions - Investing activities:
Capitalized interest during construction period $ - $ 165,281
===========================================
Financing activities
Cancellation of common shares $ 75,000 $ -
===========================================
Notes payable issued for recapitalization $ - $ 400,000
===========================================
See the accompanying notes to the consolidated financial statements.
F-4
MOMENTUM BIOFUELS, INC. AND SUBSIDIARY
(formerly Tonga Capital Corporation)
Notes to the Consolidated Financial Statements
As of March 31, 2008
(Unaudited)
Note 1 - Organization and Nature of Operations
Tonga Capital Corporation was incorporated on January 29, 1987 in and has been a
non-operating entity classified as a shell company under Rule 12b-2 of the
Securities Exchange Act of 1934. Momentum Biofuels, Inc. was incorporated in
Texas on May 8, 2006 to begin biodiesel fuel production. On May 31, 2006 Tonga
signed an Agreement and Plan of Reorganization with Momentum Biofuels, Inc. The
shareholders of Momentum Biofuels, Inc. received 39,275,000 shares of common
stock of Tonga in exchange for 39,275,000 shares of Momentum Biofuels, Inc. This
transaction was accounted for as a reverse merger with Momentum Biofuels, Inc.
being treated as the accounting acquirer.
On October 10, 2007, at the Annual Shareholders' Meeting, the majority of the
shareholders approved a resolution to change Tonga's name to Momentum Biofuels,
Inc. (Momentum).
Our business purpose is to manufacture high quality biodiesel fuel for sale to
local distributors, jobbers, and state and local government fleets.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods presented
have been included. The results of operations for interim periods are not
necessarily indicative of the results that may be expected for any other interim
period or for the full year.
Note 2--Summary Of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Momentum and its wholly- owned subsidiary. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting period. Our significant estimates
primarily relate to the assessment of warrants and debt and equity transactions
and the estimated lives and methods used in determining depreciation of fixed
assets. Actual results could differ from those estimates.
F-5
Recent Accounting Pronouncements
Momentum does not expect that adoption of recently issued accounting
pronouncements will have a material impact on its financial position, results of
operations or cash flows.
Note 3 - Going Concern
In Momentum's Annual Report on Form 10-KSB for 2007, the Report of the
Independent Registered Public Accounting Firm includes an explanatory paragraph
that describes substantial doubt about the Company's ability to continue as a
going concern. Momentum's financial statements for the three months ended March
31, 2008 have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company had an accumulated deficit of $10,064, 991 at March 31,
2008.
Momentum's ability to continue as a going concern is dependent upon its ability
to develop additional sources of capital and, ultimately, achieve profitable
operations. The accompanying consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
Note 4 - Concentration of Credit Risk
During the first quarter of 2008, three customers accounted for 100% of
Momentum's revenue. Momentum performs ongoing credit evaluations of its
customers' financial condition. Momentum's accounts receivable are unsecured. At
March 31, 2008, two customers accounted for 100% of accounts receivable.
Note 5 - Inventories
Inventory as of March 31, 2008 and December 31, 2007 consisted of the following:
Description 2008 2007
---- ----
Finished Goods $14,235 $ 20,662
Work-In-Process -0- -0-
Raw Materials 4,803 36,097
--------- --------
Total $19,038 $ 56,759
========= ========
F-6
Note 6 - Property and Equipment
Property, plant and equipment as of March 31, 2008 and December 31, 2007
consisted of the following:
Description 2008 2007
---- ----
Plant $ 3,414,592 $ 3,414,592
Plant machinery and equipment 29,810 29,810
Office furniture and equipment 52,238 52,238
Computer software 3,220 3,220
Leasehold Improvements 33,624 33,624
--------------------- ------------------
Total Assets $ 3,533,484 $ 3,533,484
--------------------- ------------------
Accumulated Depreciation &
Amortization (410,918) (280,074)
--------------------- ------------------
$ 3,122,566 $ 3,253,410
===================== ==================
Depreciation expense for the three months ending March 31, 2008 was $130,844.
Note 7 - Notes Payable to Related Parties
Notes payable as of March 31, 2008 and December 31, 2007 consisted of the
following:
Description 2008 2007
- - ------------------------------------------------------------------------ ----------------- ------------------
Non-interest bearing note payable to Ultimate Investments Corporation, a company
wholly-owned by a shareholder. The note was paid in full in January, 2008.
$ - $315,891
----------------- ------------------
Total $ - $315,891
================= ==================
Note 8 - Advances from Related Parties
Non-interest bearing advance from Jeff Ploen, who beneficially owns J. Paul
Consulting Corporation. The advance is due upon demand with no maturity date.
F-7
Note 9 - Equity Financing
During the three months ended March 31, 2008, Momentum issued 200,000 shares of
its restricted common stock for cash of $80,000. The shares were sold at a price
of $0.40 per share.
On February 12, 2008, the Board of Directors of Momentum voted to cancel the
shares of the common stock held by the Momentum Employees & Consultant Trust.
The Momentum Employees & Consultant Trust held 7,500,000 shares of restricted
common stock. The shares were previously controlled by Charles Phillips, a
shareholder and former director of Momentum, and the shares were cancelled with
his consent.
Note 10 - Options
Options were originally issued in conjunction with employment agreements for key
employees and consultants.
Option activity for the three months ended March 31, 2008 is as follows:
Expiration Exercise
Grant Date Date Price Beginning Granted Forfeited Ending
- - ------------------- ----------------- -------------- --------------- ---------------- ---------------- --------------
04/20/07 04/20/12 $1.00 2,250,000 2,250,000
10/15/07 10/15/10 $1.00 50,000 (50,000) -
10/16/07 10/16/12 $1.00 7,000,000 (1,000,000) 6,000,000
11/01/07 11/01/12 $1.00 1,000,000 1,000,000
--------------- ---------------- ---------------- --------------
10,300,000 (1,050,000) 9,250,000
=============== ================ ================ ==============
The weighted average exercise price for all options outstanding as of March 31,
2008 was $1.
Note 11 - Warrant Activity
Warrants activity for the three months ended March 31, 2008 is as follows:
Expiration Exercise
Grant Date Date Price Beginning Granted Exercised Ending
- ------------------ ----------------- -------------- ------------------ --------------- --------------- ------------------
6/27/2006 6/27/2016 $1.00 100,000 (1) 100,000
11/30/2006 11/30/2016 $1.00 10,000 (2) 10,000
12/31/2006 12/31/2016 $1.00 10,000 (2) 10,000
1/31/2007 1/31/2017 $1.00 10,000 (3) 10,000
2/1/2007 2/1/2012 $1.00 2,000 (3) 2,000
8/31/2007 8/31/2009 $1.00 1,000,000 (4) 1,000,000
10/4/2007 10/4/2009 $1.00 150,000 (5) 150,000
------------------ --------------- --------------- ------------------
$ 1,282,000 - $ 1,282,000
================== =============== =============== ==================
F-8
The weighted average exercise price for all warrants outstanding as of March 31,
2008 was $1.
(1) Momentum calculated the relative fair value of these warrants at
$162,822 using the Black-Scholes option pricing model and allocated a
portion of the original proceeds to these warrants as a discount to
the note through additional paid-in capital. The assumptions used to
value the warrants included an expected term of 10 years, a risk-free
interest rate of 4.98%, expected volatility using comparable company
volatility of 145%, an exercise price of $1 and a stock price on the
date of grant of $1.65.
(2) Momentum calculated the fair value of these warrants at $33,558 using
the Black-Scholes option pricing model and this amount has been
charged to general and administrative expenses and credited to
additional paid-in capital for the period from inception (May 8,
2006) through December 31, 2006. The assumptions used to value the
warrants include an expected term of 10 years, a risk free interest
rate of 4.98%, expected volatility using comparable company
volatility of 145%, an exercise price of $1 and an average stock
price on the date of grant of $1.65.
(3) Momentum calculated the fair value of these warrants at $18,895 using
the Black-Scholes option pricing model and this amount has been
charged to general and administrative expenses and credited to
additional paid-in capital for the year ending December 31, 2007. The
assumptions used to value the warrants include an expected term of 10
years, a risk free interest rate of 4.98%, expected volatility using
comparable company volatility of 145%, an exercise price of $1 and a
stock price on the date of grant of $1.60.
(4) Momentum calculated the fair value of these warrants at $547,579
using the Black-Scholes option pricing model and this amount has been
charged to general and administrative expenses and credited to
additional paid-in capital for the year ending December 31, 2007. The
assumptions used to value the warrants include an expected term of 2
years, a risk free interest rate of 6.50%, expected volatility using
comparable company volatility of 154%, an exercise price of $1 and a
stock price on the date of grant of $0.95.
(5) Momentum calculated the fair value of these warrants at $95,746 using
the Black-Scholes option pricing model and this amount has been
charged to general and administrative expenses and credited to
additional paid-in capital for the year ending December 31, 2007. The
assumptions used to value the warrants include an expected term of 2
years, a risk free interest rate of 4.17%, expected volatility using
comparable company volatility of 186%, an exercise price of $1 and a
stock price on the date of grant of $0.80.
F-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS CAUTIONARY
This Item 2 and the report on Form 10-Q for the period ended March 31, 2008 may
contain "forward-looking statements" regarding Momentum Biofuels, Inc. (the
"Company" or "Momentum"). In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "could," "expects,"
"plans," "intends," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms and other comparable
terminology. These forward-looking statements include, without limitation,
statements about our market opportunity, our strategies, competition, expected
activities and expenditures as we pursue our business plan, and the adequacy of
our available cash resources. Although we believe that the expectations
reflected in any forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. Actual results
may differ materially from the predictions discussed in these forward-looking
statements. Changes in the circumstances upon which we base our predictions
and/or forward-looking statements could materially affect our actual results.
Additional factors that could materially affect these forward-looking statements
and/or predictions include, among other things: (1) our limited operating
history; (2) our ability to pay down existing debt; (3) the Company's ability to
obtain contracts with suppliers of raw materials (for the Company's production
of biodiesel fuel) and distributors of the Company's biodiesel fuel product; (4)
the risks inherent in the mutual performance of such supplier and distributor
contracts (including the Company's production performance (5) the Company's
ability to secure and retain management capable of managing growth; (6) the
Company's ability to raise necessary financing to execute the Company's business
plan; (7) potential litigation with our shareholders, creditors and/or former or
current investors; (8) the Company's ability to comply with all applicable
federal, state and local government and international rules and regulations; and
(9) other factors over which we have little or no control.
The independent registered public accounting firm's report on the Company's
financial statements as of December 31, 2007, includes a "going concern"
explanatory paragraph that describes substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to the
factors prompting the explanatory paragraph are discussed below and also in Note
2 to the unaudited quarterly financial statements.
PLAN OF OPERATIONS
Momentum is a "pure play" biodiesel producer focused on servicing the U.S. Gulf
Coast and in the future, international biodiesel markets. Momentum plans to
manufacture high quality, low cost and socially responsible biodiesel fuels that
complement and integrate with the existing diesel fuel supply chain. Biodiesel
is a domestic, renewable fuel for use in diesel engines that is derived from
natural vegetable oils and animal fats. Biodiesel contains no petroleum, but can
be used in any concentration with petroleum-based diesel fuel in existing diesel
engines without engine modification.
Our initial plant in LaPorte, Texas, has been completed and is currently in
limited production. The Company's initial focus will be on efficiently operating
the La Porte plant at its planned capacity and on sales of our product. Our
marketing strategy will focus on wholesale distribution to fuel jobbers,
corporate fleets and government users. We will also use established alternative
fuel brokers where appropriate.
1
RESULTS OF OPERATIONS
Results of Operations For The Three Months Ended March 31, 2008 Compared To The
Three Months Ended March 31, 2007
The Company recognized revenue of $348,930 for the three months ending March 31,
2008 compared to no revenues during the three months ended March 31, 2007. The
Company's revenues were from its activities in processing and sale of its
biodiesel product. During the three months ended March 31, 2008, the Company
incurred cost of goods sold of $251,623, resulting in a gross profit of $97,307.
During the three months ended March 31, 2008, the Company incurred total
expenses of $1,208,814 compared to $416,619 during the three months ended March
31, 2007. The increase of $792,195 is a result of the increased operations of
the Company over the prior period. Total expenses during the three months ended
March 31, 2008 included, $430,349 in plant expenses and $778,465 in general and
administrative expenses. General and administrative expenses during the three
months ended March 31, 2008 included $335,254 of stock compensation expense for
stock options awarded to executives and key consultants.
During the three months ended March 31, 2008, the Company recognized a net loss
of $1,112,735 compared with a net loss of $423,347 for the three months ending
March 31, 2007. The increase of $689,388 was due primarily to increased expenses
related to plant operations and the increase in general and administrative
expenses, as discussed above. The net loss per share for the three months ended
March 31, 2008, was $0.02 per share compared to a net loss per share of $0.01
for the three months ending March 31, 2007.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2008, the Company had $98,098 in cash and $3,218,077 in other
assets with which to conduct its operations. There can be no assurance that the
Company will be able to carry out its business plan. Historically, our cash
needs have been satisfied primarily through proceeds from private placements of
our equity securities and debt instruments, but we cannot guarantee that such
financing activities will be sufficient to fund our current and future projects
and our ability to meet our cash and working capital needs. No commitments to
provide additional funds have been made by management or other stockholders.
Irrespective of whether the Company's cash assets prove to be inadequate to meet
the Company's operational needs, the Company might seek to compensate providers
of services by issuances of its common stock in lieu of cash.
Net cash used in operating activities during the three months ended March 31,
2008 was $453,182. During the three months ended March 31, 2007, the Company
used net cash of $468,710 in operating activities. During the three months ended
March 31, 2008, net losses of $1,112,735 were adjusted for non-cash items that
included $130,843 in depreciation and amortization expense and $335,254 in share
based compensation. During the three months ended March 31, 2007, net losses of
$423,347 were adjusted for the non-cash item of $6,352 in depreciation and
amortization expense.
During the three months ended March 31, 2008, the Company did not recognize any
cash from its investing activities. During the three months ended March 31,
2007, the Company used $614,544 from its investing activities.
2
Net cash used by financing activities during the three months ended March 31,
2008 was $225,891. During the three months ended March 31, 2007, the Company
received funds of $1,171,320 from its financing activities.
On March 7, 2008, Momentum initiated a private placement of 8,000,000 shares of
common stock at a price of $0.40 per share During the three months ended March
31, 2008, the Company sold 200,000 shares of its restricted common stock for
cash of $80,000. The shares were sold for $0.40 per share.
On January 11, 2008, the Company made final payment on the outstanding $400,000
promissory note held by Ultimate Investment Corp ("Ultimate"). The promissory
note had an issue date of June 30, 2006 and had been accruing interest at a rate
of 12% per annum, at the default rate. The final payment was $319,792, cash,
including accrued interest of $3,901.
Management will need to seek and obtain additional funding, via loans or private
placements of stock, for future operations and to provide required working
capital.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements included in this Quarterly Report on
Form 10-Q requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, management evaluates its estimates and
judgments. Management bases its estimates and judgments on historical
experiences and on various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The more significant
accounting estimates inherent in the preparation of the Company's financial
statements include estimates as to the valuation of equity related instruments
issued, and valuation allowance for deferred income tax assets. Our accounting
policies are described in the notes to financial statements included in this
Quarterly Report on Form 10-Q. The more critical accounting policies are as
described below.
The Company believes that the following are some of the more significant
accounting policies and methods used by the Company:
revenue recognition;
value of long-lived assets;
inventories; and
income taxes.
REVENUE RECOGNITION
The Company will recognize revenue when the product has been delivered to the
customer, the sales price is fixed or determinable, and collectability is
reasonably assured.
3
INVENTORIES
Inventories are stated at the lower of average cost basis or market. Abnormal
amounts of idle facility expenses, freight, handling costs, and wasted materials
are recognized as current period charges. Fixed production overhead is allocated
to the costs of conversion into inventories based on the normal capacity of the
production facility.
VALUATION OF LONG-LIVED ASSETS
The Company assesses the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors the Company considers important which could trigger an
impairment review include negative projected operating performance by the
Company and significant negative industry or economic trends. The Company does
not believe that there has been any impairment to long-lived assets as of March
31, 2008.
INCOME TAXES
Momentum and its subsidiary file a consolidated federal tax return. Momentum
uses the asset and liability method in accounting for income taxes. Deferred tax
assets and liabilities are recognized for temporary differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities, and are measured using the tax rates expected to be in effect when
the differences reverse. Deferred tax assets are also recognized for operating
loss and tax credit carryforwards. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the results of operations
in the period that includes the enactment date. A valuation allowance is used to
reduce deferred tax assets when uncertainty exists regarding their realization
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company has reviewed recently issued accounting pronouncements and the
Company does not expect that the adoption of recently issued accounting
pronouncements will have a material impact on its financial position, results of
operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - NOT
APPLICABLE
ITEM 4 CONTROLS AND PROCEDURES
Disclosures Controls and Procedures
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act). As a result of this evaluation, we identified
material weaknesses in our internal control over financial reporting as of
December 31, 2007. Accordingly, we concluded that our disclosure controls and
procedures were not effective as of December 31, 2007.
4
As required by SEC Rule 15d-15(b), our Chief Executive Officer carried out an
evaluation under the supervision and with the participation of our management,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period
covered by this report. Based on the foregoing evaluation, our Chief Executive
Officer has concluded that our disclosure controls and procedures are not
effective in timely alerting them to material information required to be
included in our periodic SEC filings and to ensure that information required to
be disclosed in our periodic SEC filings is accumulated and communicated to our
management, including our Chief Executive Officer, to allow timely decisions
regarding required disclosure as a result of the deficiency in our internal
control over financial reporting discussed below.
The material weakness identified in our annual report on Form 10-KSB for the
year ended December 31, 2007 was related to a lack of an accounting staff
resulting in a lack of segregation of duties and accounting technical expertise
necessary for an effective system of internal control.
ITEM 4T. CONTROLS AND PROCEDURES
Management's Quarterly Report on Internal Control over Financial Reporting.
Management's assessment of the effectiveness of the registrant's internal
control over financial reporting is as of the quarter ended March 31, 2008.
Based on the evaluation, management concluded that there is a material weakness
in our internal control over financial reporting. The material weakness relates
to the monitoring and review of work performed by contracted accounting
personnel in the preparation of audit and financial statements, footnotes and
financial data provided to Momentum's registered public accounting firm in
connection with the annual audit. Until October 2007, all of our financial
reporting was carried out by our Chief Financial Officer, and we did not have an
audit committee established until October 12, 2007. This lack of an accounting
staff results in a lack of segregation of duties and accounting technical
expertise necessary for an effective system of internal control.
A material weakness is a control deficiency, or combination of control
deficiencies, in ICFR such that there is a reasonable possibility that a
material misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis by employees in the normal course of
their assigned functions.
Notwithstanding this material weakness, we believe that the consolidated
financial statements included in this report fairly present, in all material
respects, our consolidated financial position and results of operations as of
and for the quarter ended March 31, 2008.
5
Remediation of Material Weakness
As discussed in Management's Annual Report on Internal Control over Financial
Reporting, as of December 31, 2007, there were material weaknesses in our
internal control over financial reporting. We are in the process of analyzing
our processes for all business units and the establishment of formal policies
and procedures with necessary segregation of duties, which will establish
mitigating controls to compensate for the risk due to lack of segregation of
duties. In addition, we are evaluating the necessary steps to improve our
controls over financial reporting and we are in the initial planning phase of
upgrading, where possible, certain of our information technology systems
impacting financial reporting.
Through these steps, we believe we are addressing the deficiencies that affected
our internal control over financial reporting as of December 31, 2007 and March
31, 2008. However, the effectiveness of any system of internal controls is
subject to inherent limitations and there can be no assurance that our internal
control over financial reporting will prevent or detect all errors. Because the
remedial actions require hiring of additional personnel, upgrading certain of
our information technology systems, and relying extensively on manual review and
approval, the successful operation of these controls for at least several
quarters may be required before management may be able to conclude that the
material weakness has been remediated.
The aggregate costs of remediation are unknown at this time.
Changes in Internal Control Over Financial Reporting.
There was no change in our internal control over financial reporting that
occurred during the fiscal quarter ended March 31, 2008, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In February 2008, Momentum received notice of its inclusion in a legal complaint
filed against Vertex Energy by Purity Water Company of San Antonio in the
Circuit Court of Mobile, Alabama. The complaint alleges that Vertex, the
defendant, contracted with Purity Water, the plaintiff, to remove water from two
million gallons of Biodiesel stored in Alabama. The complaint further alleges
that Vertex engaged several other companies, including Momentum Biofuels, Inc.,
as subcontractors to service the contract.
Momentum submitted an affidavit to the court on April 25, 2008, attesting that
the Company had no contractual agreement with either the plaintiff or any of the
other parties named in the complaint. Momentum has since been dismissed from the
suit without prejudice by the presiding District Court in Mobile, Alabama.
6
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company made the following unregistered sales of its securities from January
1, 2008 through March 31, 2008.
TITLE OF NO. OF SHARES
DATE OF SALE SECURITIES CONSIDERATION CLASS OF PURCHASER
- ------------------------------------------------------------------------------------------------------
03/27/08 Common Stock 80,000 $0.40 per share Accredited Investor(s) -
Private Placement
Memorandum
Exemption From Registration Claimed
All of the sales by the Company of its unregistered securities were made by the
Company in reliance upon Section 4(2) of the Act. All of the individuals and/or
entities listed above that purchased the unregistered securities were all known
to the Company and its management, through pre-existing business relationships,
as long standing business associates, friends, and employees. All purchasers
were provided access to all material information, which they requested, and all
information necessary to verify such information and were afforded access to
management of the Company in connection with their purchases. All purchasers of
the unregistered securities acquired such securities for investment and not with
a view toward distribution, acknowledging such intent to the Company. All
certificates or agreements representing such securities that were issued
contained restrictive legends, prohibiting further transfer of the certificates
or agreements representing such securities, without such securities either being
first registered or otherwise exempt from registration in any further resale or
disposition.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS.
The following is a complete list of exhibits filed as part of this Form 10-Q.
Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of
Regulation S-K.
31.1 Certification by the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act.
32.1 Certification by the Chief Executive Officer pursuant to Section 906
of the
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MOMENTUM BIOFUELS, INC.
Date: May 20, 2008 By: /s/Gregory A. Enders
--------------------
Gregory A. Enders, President
And Chief Executive Officer
and Principal Accounting Officer